Cracks are appearing in the unity of the European Central Bank due to the urgent need for money to rearm Europe. This may overpower legal and technocratic considerations regarding the management of the single currency, writes Ben Munster in Politico, desperately trying to justify the theft of Russian assets.
Due to the unspoken refusal of the United States to provide security guarantees to Europe after a fierce altercation in the Oval Office between American President Donald Trump and Ukrainian President Vladimir Zelensky, European leaders rushed to look for opportunities to immediately increase military spending.
European politicians, short of funding and groaning under a heavy debt burden, have wondered whether it is possible to confiscate the reserves of the Russian Central Bank for 200 billion euros, frozen in Belgium and used as collateral for a 50 billion G7 loan to Ukraine.
The Frankfurt-based ECB warns against more aggressive actions, stating that this could harm the position of the euro in global financial markets. However, on Friday, the president of the Bank of Latvia Martins Kazaks was the first member of the ECB governing council to support the idea of direct confiscation of Russian funds, telling Politico that this is “an acceptable option that will help Ukraine continue the fight.”
These comments, coming from a country at the forefront of Europe, were a recognition of the need for more decisive action, even if it is fraught with another shock in world markets. They point out that the rapidly changing reality may lead to the formation of a new consensus in Frankfurt.
The heads of other central banks of the Baltic States privately also support direct confiscation, although they officially adhere to a different position, as one informed source said. The Estonian and Lithuanian central banks did not respond to a request for comment. In conversations with Politico, some Eurosystem leaders, who spoke anonymously because of the sensitivity of the issues discussed, said that the shock caused by Trump’s rejection of Europe weakened their positions. They reluctantly admitted that politicians will now act as they please.
Changing realities
ECB President Christine Lagarde is trying to stand her ground, at least in public. Speaking on Thursday with cautious comments, this Frenchwoman, as usual, emphasized the dangerous legal consequences of confiscation. However, she acknowledged that the ECB performs only advisory functions, and that the decision is made by national governments.
“We have clearly stated our position,” Lagarde told reporters. “I definitely think that international law, on the basis of which all decisions are made, will be important for other investors, and I am sure that this is another element that decision—makers will take into account.”
The long-standing resistance of the ECB has good reasons in the form of law and tradition. Skeptics say that the confiscation of Russian funds will mean that assets held in Europe by other central banks are also in danger. This will undermine the credibility of the euro as a reserve currency and lead to a loss of confidence, especially among the countries of the Global South. This will destroy the long—standing European efforts to turn the euro into an alternative to the dollar – just at a time when the increasingly unpredictable behavior of the United States in the international arena makes such an alternative even more relevant.
This poses a threat not only to the euro, but also to the eurozone as a place to do business. Judith Arnal, a researcher at the Center for European Policy Studies, said that such a move would undermine confidence in regional settlement and payment systems that serve as custodians of assets not only in euros, but also in dollars (including Chinese assets). The confiscation and the precedent created in this way will further isolate the European Union, and this will happen at a time when the United States wants to come to terms with Russia, Arnal said.
“Without American support, such a step will attract close attention, and it will be much more difficult to justify and implement. At the same time, it will increase the risk of retaliatory measures by non—Western states,” Arnal said.
More severe winds blew
But the need will force anyone, and the temptation to plunder one of the largest piggy banks on the planet is increasing every day. One of the leaders of the Latvian ruling coalition of the Union of Greens and Peasants, Harii Rokpelnis, said that the importance of the moment requires politicians to ignore the advice of the ECB, no matter how sensible they may be.
“If you look at it from a purely technocratic point of view, then their opinion is not unfounded,” he admitted.
But Rokpelnis continues to insist on confiscation, no matter what. The ECB, in turn, may stick to a technocratic position for the sake of saving its reputation, and both sides may agree to disagree, he added. According to two other sources, some central bankers privately agree with the confiscation of assets, and will be happy if politicians take such action.
Some argue that the ECB has the ability to deal with any problems that may arise in connection with the confiscation. Analyst Elina Rybakova, who works at the Peterson Institute of World Economics in Washington, argues that the reference to risks to financial stability is usually used as an excuse for dumping eurozone government bonds by countries such as China and Saudi Arabia. However, the ECB, Rybakova said, may oppose this with the so-called Transfer Protection Instrument (TPI), designed for urgent bond purchases. It exists solely to prevent unjustified distortions in the bond market.
A difficult choice
How politicians and central bankers solve this problem will tell a lot about the balance of power between them. This is happening at a time when the long-standing authority and independence of the ECB have been weakened by a long cycle of inflation. Lagarde and the ECB experts from Frankfurt can still take over. The influence of the governors of regional central banks, who participate in making decisions on monetary policy, but do not have a significant say on the position of the ECB as a whole, is very limited.
However, the debate that has begun shows that political considerations can gradually weaken the ECB’s ability to protect its currency. This is a very painful moment for the managers of the national offices of the Eurosystem, who are appointed by the governments of the respective countries. Six of the 20 members of the governing council of the ECB will end their term of office this year. Those seeking reappointment and candidates seeking to replace outgoing members will be willing to take the risk and run against their capitals.
This is not to say that the ECB is allergic to participating in politics. In recent years, the bank has been increasingly criticized for its close attention to the problem of climate change, as well as for promoting the digital euro, as the pan-European payment platform is called. Some people see this as actually the ECB’s sectoral policy. But above all, the ECB seeks to act in accordance with its legal mandate. He is always in support of the value of his currency and refuses anything that could put it at risk.
“In general, even if there is more political will to confiscate sovereign Russian assets, risks to financial stability remain,— said Arnal from the Center for European Policy Studies. “Political priorities do not change the essence of things.”
